Consultancy companies, phase transitions

At first it’s all fine. You heat it up, and the temperature rises, as shown on the graph, A to B. Then it goes through a phase change. You keep on heating it, but the temperature doesn’t go up. Instead, the ice melts.This is B to C on the diagram. Then when it’s all melted, and you keep on heating it, the temperature goes up again, until it starts boiling. That’s point D on the diagram. When you heat boiling water, the temperature doesn’t go up. Instead, it turns into a gas, until it’s all evaporated. That’s at E. Then you can keep heating the gas, and its temperature goes up, and up and up, until we reach the realms of high-temperature plasma physics and the interior of the sun.

Something like this happens to small companies as they grow. I only know about consultancy companies, so I’m using them as an example. Here’s what happens.

At first, it’s just a few pals, or even just one person. The more people you add, and the more effort you put in, the more money you make and the more effect you have. It’s a very satisfying experience.

Then, at about 10 people, point B on the diagram, it starts to become a lot less satisfying. You add more people, yet you don’t seem to be making more money. The company is going through a phase transition. Internal changes are taking place. You have to conform to new regulations: you need a fire officer, a data protection officer, and health and safety officer. All these need training days which take them away from clients. Furthermore, above about 10 people, you need internal processes. Communication no longer happens spontaneously, it has to be planned. It takes time. As more people arrive, there has to be a recruitment process, and an appraisal process. And now we need a strategy meeting. As a result of this, sales people are now needed, and perhaps some other posts which, while valued and important, are not themselves directly fee-earning. However, if you get through this phase, and don’t give up, you get to point C on the diagram.

Now, once again, additional effort is rewarded. You’ve got your operational systems in place. New recruits deliver additional revenue, and you are on the growth path again. Well done. But don’t sit back. There’s another phase transition.

I’m not quite sure where this is. Perhaps at about 500 to 1000 people. At a certain point, you start to affect the market. When you are a small consulting company, the world is abundant. You can double your income, and still there’s plenty more out there. You live in the market, but you don’t affect it. At a certain point, this is no longer true. Once you are a certain size, the competition notices you. Your clients start to observe that they’ve placed all their business with your company and they ask themselves if that was wise. Other companies tout for your staff. You become a target for acquisition. So this is the next phase transition: becoming major player in the market.

As with the first phase transition, disproportionate effort goes into activities which don’t increase revenue. You have to create Intellectual Property to defeat the competition. You install a fully-functioning marketing department, which is there to affect the market but which does no selling and certainly no fee-earning consulting. You need lawyers on the staff, and accountants. They have their own departments, even. You need serious IT, not just people’s laptops. You expend effort responding to procurement frameworks. You need people who patrol the upper floors of client premises, making connections and providing air-cover for project teams, but who invoice no fees. Many of these things increase the value of the company. This is good if you are thinking of selling it in the foreseeable future. Are you?

Assuming you don’t sell it, and you aren’t acquired, and you manage to keep your fee-earning staff and your fee-paying clients through this difficult phase, you enter the big time. You have the systems not only for operations, but also for growth. Now you have a money-making machine.

Perhaps there are further phase transitions, once you are a major player in your market place. I don’t know. I’ve not been there. Can someone else take over the story?